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tem 1.01 Entry into a Material Definitive Agreement.
Membership Interest Purchase Agreement
On October 26, 2018, Enservco Corporation, a Delaware corporation (the “Company”) entered into a Membership Interest Purchase Agreement (the “Agreement”) with Adler Hot Oil Holdings, LLC, a Delaware limited liability company (the “Seller”), pursuant to which the Company acquired all of the outstanding membership interests of Adler Hot Oil Service, LLC, a Delaware limited liability company (“Adler”) for an aggregate purchase price of $12.5 million, subject to customary purchase price adjustments (the “Transaction”). Certain former members of Adler are also parties to the Agreement. Adler is a national provider of frac water heating and hot oiling services, whose assets consist primarily of vehicles and equipment, with a complementary base of customers in several oil and gas producing basins where the Company operates.
The consideration paid or to be paid by the Company under the Agreement includes: (i) $3.7 million in cash paid to or for the benefit of the Seller at the closing; (ii) a subordinated promissory note issued to the Seller in the principal amount of $4.8 million, plus interest accrued thereon (the “Seller Subordinated Note”), as further discussed below; (iii) retirement by the Company of $2.5 million in indebtedness of Adler; (iv) an earn-out payment of up to $1.0 million in cash payable to the Seller, the actual amount of which is subject to the Company’s satisfaction of certain EBITDA-related performance conditions during 2019; and (v) $1.0 million in cash held by the Company and payable to the Seller on the 18 month anniversary of October 26, 2018, subject to offset by the Company for any indemnification obligations owed by the Seller or certain former members of Adler under the Agreement.
The Agreement contains customary representations, warranties, and covenants of the Company, the Seller, and certain former members of Adler. The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement, which is attached as Exhibit 2.1 to this Current Report on Form 8-K (this “Form 8-K”) and incorporated by reference. The Agreement is filed herewith to provide readers with information regarding its terms. It is not intended to provide any other factual information about the parties. In particular, the assertions embodied in the representations and warranties contained in the Agreement were made as of the date of the Agreement only and are in certain instances qualified by information in confidential disclosure schedules provided by the parties to each other in connection with the signing of the Agreement. These disclosure schedules contain information that modifies, qualifies, and creates exceptions to the representations and warranties set forth in the Agreement. Moreover, certain representations and warranties in the Agreement may have been used for the purpose of allocating risk between the parties rather than establishing matters of fact. Accordingly, readers should not rely on the representations and warranties in the Agreement as characterizations of the actual statements of fact about the parties.
Seller Subordinated Note
In connection with the Transaction and pursuant to the terms of the Agreement, on October 26, 2018, the Company issued to the Seller the Seller Subordinated Note in the original principal amount of $4.8 million, and unpaid amounts thereunder bear simple interest at a rate of 8% per annum (or 11% while any default is continuing). The Company is required to make principal payments on November 30, 2018 of $800,000, on February 28, 2019 of $200,000, and on the final maturity date of the Seller Subordinated Note of March 31, 2019 of all remaining outstanding principal and interest. The Company may prepay the Seller Subordinated Note in whole or in part, without penalty or premium, at any time prior to its maturity date. The Seller Subordinated Note is guaranteed by the Company’s subsidiaries and secured by a junior security interest in substantially all assets of the Company and its subsidiaries. The Seller Subordinated Note is subject to a subordination agreement by and among the Company, the Seller, and East West Bank, a California state-chartered banking corporation (“East West Bank”).
The foregoing description of the Seller Subordinated Note does not purport to be complete and is qualified in its entirety by reference to the full text of the Seller Subordinated Note, which is attached as Exhibit 10.1 to this Form 8-K and is incorporated by reference.
Second Amendment to Loan and Security Agreement and Consent
In connection with the Transaction, on October 26, 2018, the Company and East West Bank entered into a Second Amendment to Loan and Security Agreement and Consent (the “Second Amendment to LSA”), which amends the Loan and Security Agreement dated August 10, 2017 by and between the Company and East West Bank (the “Loan Agreement”). Pursuant to the Second Amendment to LSA, East West Bank consented to the Transaction and increased the maximum borrowing limit of the senior secured revolving credit facility provided to the Company under the Loan Agreement to $37.0 million. Proceeds of $6.2 million from the increased senior secured revolving credit facility were used in the Transaction to make the cash payments at closing and retire the indebtedness of Adler.
On October 26, 2018, in connection with the Second Amendment to LSA, Adler entered into a Joinder Agreement, pursuant to which Adler was joined as a party to the Loan Agreement.
The foregoing description of the Second Amendment to LSA does not purport to be complete and is qualified in its entirety by reference to the full text of the Second Amendment to LSA, which is attached as Exhibit 10.2 to this Form 8-K and is incorporated by reference.